You Can’t Do That: Changing Tides in Washington Non-Compete Agreements
Non-compete clauses are commonplace in many agreements. Generally, non-compete clauses limit an individual’s ability to compete with an employer’s business while working for the employer or after ending the working relationship. With a growing economy, cities like Seattle rely on attracting top talent. Since most employees stay on for just a few years, workers (and other employers) benefit greatly from the ability of employees to move around without being subject to an unduly restrictive non-compete clause.
States vary in the enforceability of such clauses. Some states, like California, hold outright that post-employment non-compete obligations are unenforceable. Prior to this new law, in Washington state, a court will enforce a non-compete clause if it deems the restraints on competition are reasonable. The courts used a three-factor test to assess the reasonableness of non-compete clauses.
The three-factor test in Washington analyzes the reasonableness, and in turn, enforceability, of these clauses. The test assesses whether the restraint:
- Is necessary for the protection of the business of the employer;
- Imposes no greater restriction on the employee than is reasonably necessary; and
- Doesn’t injure the public by limited the goods or services of the employee.
A new bill concerning restraints on persons engaging in lawful professions, trades, or businesses, SB 5478, signed into law on May 8, 2019, dramatically changes the rules around non-compete clauses in Washington. These changes might tip the balance of power in favor of workers, performers, and independent contractors.
Instead of relying on the three-factor test, the new law specifies types of permissible restrictions in non-compete clauses. Notably, non-compete clauses will only be enforceable for:
- Employees paid $100,000 or more annually, only when disclosed in writing at the time of hire or with independent consideration if enacted later (meaning you pay them specifically to agree to the new terms of non-competition), and only for a duration of 18-months or less;
- Independent contractors paid $250,000 or more annually; and
- Performers and performance spaces for 3 calendar days.
Non-compete clauses will are unenforceable:
- When an employee is terminated through a layoff unless the employee continues to be paid his/her base salary through the duration of the agreement; or
- If the clause attempts to apply another state’s laws.
Importantly, the new law also limits an employer’s right to restrict its employees’ freedom to moonlight in some circumstances. “An employer may not restrict, restrain, or prohibit an employee earning less than twice the applicable state minimum hourly wage from having an additional job, supplementing their income by working for another employer, working as an independent contractor, or being self-employed.” So if an employee makes less than twice the state minimum hourly wage, an employer can’t prevent that employee from earning otherwise.
The bill signed into law on May 8, 2019, and will go into effect on January 1, 2020.
Implications Of The New Law
Every business that hires employees, independent contractors, or performers in Washington should take some time to consider the implications of these changes. In anticipation of this shift in how the state assesses the enforceability of non-compete clauses, businesses have until January 1, 2020, to review and modify employee policies and revise non-compete clauses in contracts.